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Fitch Affirms Ceska and Komercni at 'A-', Upgrades Slovenska to 'A-'; Outlooks Stable
April 26, 2017 / 2:12 PM / 6 months ago

Fitch Affirms Ceska and Komercni at 'A-', Upgrades Slovenska to 'A-'; Outlooks Stable

(The following statement was released by the rating agency) WARSAW/LONDON, April 26 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Czech Republic-based Ceska Sporitelna (Ceska) and Komercni Banka (Komercni) at 'A-' and upgraded Slovakia-based Slovenska Sporitelna (Slovenska) to 'A-' from 'BBB+'. All Outlooks are Stable. The Agency has upgraded the Short-Term IDRs of Ceska and Slovenska to 'F1' from 'F2' and affirmed Komercni at 'F1'. We have also affirmed the Viability Ratings (VRs) of Ceska and Komercni at 'a-' and Slovenska at 'bbb+'. A full list of rating actions is available at the end of this commentary. The upgrade of Slovenska's IDRs reflects our reassessment of parent company ability to provide support, following its upgrade in March 2017 (see 'Fitch Upgrades Erste Group Bank AG to 'A-'; Outlook Stable' available on www.fitchratings.com). The upgrade of Ceska's Short-Term IDR is driven by our revision of the strength of its liquidity profile. The affirmation of Long-Term IDRs of Ceska and Komercni reflects their sound fundamental credit quality and no major changes in their financial metrics over the last 12 months. Erste Group Bank AG (A-/Stable/a-) owns 99% of Ceska and 100% of Slovenska, while Komercni is 60% owned by Societe Generale (SocGen; A/Stable/a). KEY RATING DRIVERS IDRS, SUPPORT RATING The IDRs of Ceska and Komercni are driven by their standalone strength, as reflected in their VRs. Komercni's IDRs are also underpinned by potential support from SocGen. The IDRs and the Support Rating of Slovenska were upgraded by one notch and as a result the bank's Long-Term IDR is now support-driven and equalised with Erste, sharing the same Stable Outlook. The Stable Outlooks on Ceska and Komercni reflect broadly balanced risks related to their credit profiles (and SocGen's). The three banks' Short-Term IDR's of 'F1' are the higher of the two possibilities corresponding to the Long-Term IDR of 'A-'. Ceska's coverage of its short-term liabilities by liquid assets is strong and its stable funding benefits from its leading retail deposit franchise in the Czech Republic. Komercni's and Slovenska's Short-Term IDRs are underpinned by their respective parents' solid liquidity and our view that parental propensity to support is more certain in the near term. Komercni's Support Rating of '1' reflects Fitch's view of an extremely high probability of support from SocGen. Our view is mainly based on Komercni's strong synergies with SocGen and its role as the largest and best performing subsidiary in the strategically important Central and Eastern Europe (CEE) region. We also take into consideration Komercni's long and successful track record in supporting group objectives (which is likely to continue), majority ownership of the subsidiary, a high level of management and operational integration. The Support Ratings of Ceska ('2') and Slovenska ('1') reflect high and extremely high probability of parental support, respectively. The lower Support Rating for Ceska reflects its larger size relative to Erste, which in our opinion constraints the parent's ability to provide timely and sufficient support. At end-2016, Ceska and Slovenska respectively accounted for about 19% and 7% of Erste's assets, and about 34% and 15% of pre-tax profit. Both subsidiaries are key and integral components of the Erste group's business, as they provide banking products and services in Erste's core markets. Erste's long-term strategic presence in the CEE region reflects the geographical proximity of the Czech, Slovak and Austrian markets. Our assessment of support takes also into consideration the significant contribution from both subsidiaries to the group's profitability and capitalisation, a high level of management and operational integration, the ownership structure, and a long and successful history of supporting the objectives of Erste group. VR The VRs of the three banks reflect their conservative risk appetite, strong capitalisation, stable funding based on customer deposits and ample liquidity. Healthy asset quality and solid through-the-cycle profitability are underpinned by established domestic franchises, consistent strategies and supportive operating environments. Slovenska's VR is one notch below that of the Czech banks because the Slovak operating environment is less resilient to economic shocks and due to the bank's stronger growth appetite and moderately weaker asset quality. The three banks apply conservative underwriting standards through-the-cycle, supported by strong control environments and tight parental supervision. The accelerated credit expansion (driven by margin pressure) was moderate at Ceska and Komercni (about 8% growth in 2016 and about 6% in 2015). Slovenska grew faster than peers, but loan growth moderated in 2016 to about 9% (2015: 15%, 2014: 12%) and is unlikely to increase in 2017 and beyond. The central banks of Slovakia and the Czech Republic have tightened standards on mortgage lending (particularly for loans with high loan/value ratios) and introduced 50bp countercyclical buffers from January 2017 (Czech Republic) and August 2017 (Slovakia). These measures should slow market loan growth and should also reduce the risk of a residential property price bubble in both markets. Market risk at the three banks is moderate and stems mainly from structural interest rate risk, due to their high stocks of fixed-income loans (mainly mortgages). However, we believe that their margins are sufficient to cushion potential interest rate stress. Capitalisation is a considerable rating strength and benefits from the three banks' solid profitability and fairly low credit risk profile. At end-2016, the Fitch Core Capital (FCC) ratio was about 22% at the three banks. The ratio of unreserved impaired loans to FCC was low and equalled 3% at Ceska, 7% at Komercni and 10% at Slovenska. The three banks' strong self-funding capacity reflects their ample liquidity and well-established domestic deposit franchise in the retail (Ceska and Slovenska) and the corporate (Komercni) segments. At end-2016, the gross loans/customer deposits ratio equalled 75% at Ceska, 85% at Komercni and 93% at Slovenska. The higher ratio at Slovenska should be considered alongside a considerably higher reliance on stable and long-term funding through covered bonds. Customer deposits represented the vast majority (about 85%-90%) of total funding (excluding derivatives). We expect that the strong Czech and Slovak economic environment will continue to support asset quality in 2017. Retail borrowers benefit from low interest rates, falling unemployment and rising disposable income. The solid GDP growth in both economies bodes well for the performance of corporate customers. Our assessment of asset quality at the three banks also takes into consideration a high share of collateralised lending, substantial provision coverage of impaired loans, modest write-offs of legacy bad debts, a high degree of stability in asset quality through-the cycle and relatively low (moderate at Komercni) portfolio concentration by industries and single names. In 2015 and 2016 the impaired loans ratio improved due to loan growth (mainly collateralised), recoveries and subdued default rates. The ratios shrank to 3.2% (Ceska), 3.8% (Komercni) and 4.5% (Slovenska). The reserve coverage of impaired loans is reasonable (about 70% at Komercni and Slovenska and about 80% at Ceska) given the largely collateralised lending and high loss absorption capacity, through the pre-impairment operating profit. The three banks' results are closely tied to the performance of their domestic economies, which are likely to remain supportive in 2017 and beyond. However, profits in 2017 will be likely weaker, due to material one-off gains in 2016 and continued margin pressure. In 2016 the banks' margins net of loan impairment charges contracted to 2.7% (Ceska), 2.5% (Komercni) and 3% (Slovenska). The margins are still strong by CEE standards, essentially in light of the banks' low credit risk profiles. Further credit and operating cost improvement is unlikely, due to already high operating cost efficiency and low impairment charges. RATING SENSITIVITIES IDRS AND VRS Ceska's IDRs are sensitive to changes in its VR. Komercni's and Slovenska's IDR's could be upgraded if their parents are upgraded. A downgrade of Komercni would require a downgrade of both its VR and SocGen's Long-Term IDR. Slovenska would be downgraded if Erste is downgraded. Upside potential for the three banks' VRs remain limited, given their concentration in what are fairly small economies and the already rather high levels of their respective VRs. The VRs of the three banks would likely be resilient to a moderate deterioration in the operating environment. However, a sharp deterioration in the eurozone economies (which are key trading partners for the Czech Republic and Slovakia), materially affecting the banks' asset quality and performance, could lead to the VRs being downgraded. SUPPORT RATING The Support Ratings and the floors they provide for the subsidiaries' Long-Term IDRs, are sensitive to changes in the parent banks' Long-Term IDRs, or of Fitch's view of their propensity or ability to support their subsidiaries. Fitch does not expect the three banks' strategic roles to diminish in the medium term. The rating actions are as follows: Ceska Sporitelna Long-Term IDR: affirmed at 'A-'; Outlook Stable Short-Term IDR: upgraded to 'F1' from 'F2' Support Rating: affirmed at '2' Viability Rating: affirmed at 'a-' Komercni Banka Long-Term IDR: affirmed at 'A-'; Outlook Stable Short-Term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Viability Rating: affirmed at 'a-' Slovenska Sporitelna Long-Term IDR: upgraded to 'A-' from 'BBB+'; Outlook Stable Short-Term IDR: upgraded to 'F1' from 'F2' Support Rating: upgraded to '1' from '2' Viability Rating: affirmed at 'bbb+' Contact: Primary Analyst Michal Bryks, ACCA Director +48 22 338 6293 Fitch Polska SA Krolewska 16, Warsaw 00-103 Secondary Analyst Jakub Kopiec, CFA Analyst +48 22 330 6702 Committee Chairperson Artur Szeski Senior Director +48 22 338 6292 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. 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